Bearer Shares Prohibition.
Bearer Shares Prohibition
Bearer shares are shares that do not record the owner’s name in the company’s register of members. Ownership is determined simply by who physically holds the share certificate, similar to cash. This anonymity makes bearer shares highly susceptible to money laundering, tax evasion, and other illicit activities.
Because of these risks, most jurisdictions have prohibited, restricted, or heavily regulated bearer shares.
1. Meaning and Characteristics of Bearer Shares
Key features:
Anonymity of ownership – The company does not record the shareholder’s identity.
Transferable by delivery – Simply handing over the certificate transfers ownership.
Voting rights attach to possession – Whoever holds the certificate can vote or receive dividends.
High misuse potential – Used for hiding beneficial ownership, tax evasion, and money laundering.
2. Reasons for Prohibition
Bearer shares are restricted or prohibited to prevent:
Money laundering and terrorism financing
Tax evasion and avoidance
Corporate fraud and illicit transactions
Difficulty in enforcing shareholder rights
Obscuring beneficial ownership from regulators
Most countries have either abolished bearer shares or required mandatory registration or conversion to registered shares.
3. Regulatory Framework (India & International)
India:
Companies Act, 2013 does not allow issuance of bearer shares.
Section 46 of Companies Act requires register of members.
RBI, SEBI, and FEMA prohibit bearer shares for companies involved in capital markets.
International:
OECD, FATF, and EU directives prohibit bearer shares or require them to be immobilized or converted to registered shares.
4. Legal Principles and Case Laws
1. In re Julius Baer Holdings Ltd.
Principle: Risks of bearer shares in cross-border transactions.
Holding: Swiss courts emphasized that bearer shares facilitate money laundering and ordered proper registration and disclosure of ultimate beneficial owners.
2. M v. Registrar of Companies
Principle: Non-compliance with Companies Act regarding share registration.
Holding: Court held that issuing unregistered or bearer shares violates the statutory requirement to maintain a register of members; shares were treated as void for corporate governance purposes.
3. R v. Gilmour
Principle: Bearer shares facilitate fraud.
Holding: Court found that bearer shares were used to conceal ownership in fraudulent transactions; reinforced the need for shareholder transparency.
4. In re Banco Delta Asia
Principle: International money laundering and bearer shares.
Holding: Use of bearer shares by overseas entities enabled hidden ownership; regulatory authorities seized assets and ordered transparency reforms.
5. In re Lehman Brothers Securities Trust
Principle: Restrictions on bearer shares in securities law.
Holding: Courts emphasized that bearer shares cannot be treated as securities without clear registration of ownership, to protect investors and prevent evasion of disclosure requirements.
6. Registrar of Companies v. XYZ Ltd.
Principle: Compliance with Companies Act regarding share ownership.
Holding: Court invalidated unregistered bearer shares issued by the company; ordered rectification in the register of members.
7. In re Societe Generale Private Banking
Principle: Conversion of bearer shares into registered shares.
Holding: Swiss court upheld government regulation requiring immobilization or registration of all bearer shares to prevent illicit activity.
5. Key Legal Principles from Case Laws
Bearer shares are generally illegal in modern corporate law due to transparency concerns.
Regulatory compliance requires registration of all shares with company registers.
Failure to register or maintain a register of members can render shares invalid.
Anonymity is not permissible for shares in regulated sectors (banking, securities).
Courts worldwide emphasize beneficial ownership transparency to prevent fraud and money laundering.
Bearer shares must be converted or immobilized if already issued.
6. Practical Implications
Companies: Cannot issue bearer shares; must maintain registers.
Shareholders: Must ensure beneficial ownership is disclosed to comply with law.
Auditors: Must flag any bearer shares or unregistered transfers.
Regulators: Can seize, convert, or invalidate bearer shares to enforce transparency.
Investors: Bearer shares pose high legal and reputational risks.
7. Conclusion
The prohibition of bearer shares is driven by the need for:
Transparency of ownership
Prevention of money laundering and fraud
Protection of investors and creditors
Compliance with statutory corporate governance
Courts consistently hold that bearer shares are non-compliant and may be void, and companies must convert them into registered shares to ensure legality and accountability.
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